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FormFactor’s(FORM - Analyst Report) first-quarter 2013 loss of 18 cents per share was narrower than the Zacks Consensus Estimate of 26 cents loss per share.

Revenues of $52.6 million were up 10.4% sequentially and 51.2% from the year-ago quarter.

Revenues by End User

The system on chip (SoC), DRAM and Flash customers generated 50%, 42% and 8% of first-quarter revenues, respectively.

The SoC business generated revenues of $26.4 million, up 6.5% sequentially. FormFactor is reaping the benefits of its MicroProbe acquisition, by virtue of which it became the largest supplier of probe cards to the fast growing SoC probe card market. Overall strength in this market is currently being driven by the move from PC applications toward mobile application processors where the probe card solutions are more complex and require higher parallelism.

The DRAM business rose 33.3% sequentially to $22.0 million. The strength in DRAM probe cards resulted from stronger mobile demand and stronger pricing of DRAM devices that began in the fourth quarter of 2012. FormFactor is seeing a rise in demand for DRAM consumption in smartphones, which will exceed PC demand.

We believe that the DRAM market may recover as the industry undergoes a structural shift from PC centered computing to mobile and cloud centered computing.

The Flash business was down 34.3% sequentially to $4.2 million. NAND revenues were $2.5 million while NOR accounted for the balance. Both product lines saw revenue declines at a similar rate. .

Margins

The GAAP gross margin increased 2,384 basis points (bps) sequentially and 531 bps year over year to 17.3%. Higher revenues and a favorable product mix drove the expansion in gross margins.

Total operating expenses of $29.6 million were up 35.3% sequentially and 33.7% from the year-ago quarter. The operating margin was (39.0%), up 1,350 bps sequentially and 1,266 bps from the year-ago quarter. Selling, general and administrative (SG&A) expenses as a percentage of sales declined both sequentially and from last year’s quarter. While research and development (R&D) expenses declined from last year, it increased sequentially.

Net Income

Pro forma net loss was $9.9 million or 18.8% of sales, compared to a loss of $16.9 million or 35.4% in the previous quarter and a loss of $17.3 million or 49.8% in the year-ago quarter.

Including restructuring charges and impairment of long-lived assets on a tax-adjusted basis, GAAP net income per share came to (37 cents) in the last quarter compared to earnings of 1 cent  in the prior quarter and a loss of 35 cents in the year-ago quarter.

Balance Sheet

Inventories of $24.7 million were up 4.5% in the first quarter of 2013. The company exited the quarter with cash and marketable securities of $153.6 million, down $12.2 million during the quarter. FormFactor has no debt. Long-term liabilities totaled to $10.5 million at quarter-end.

Cash used from operations was $11.1 million in the first quarter compared with $110.4 million in the prior quarter.

Guidance

For the second quarter, FormFactor expects revenues in the range of $58.0−$62.0 million. The non-GAAP gross margin is expected in the range of 28%–31%. Non-GAAP operating expenses are expected to be $21.0–$22.0 million. The cash burn in the quarter is expected to be $3.0–$5.0 million, excluding stock repurchase.

Our Recommendation

FormFactor is an original equipment manufacturer (OEM) of automated wafer probe cards that are used in the back-end portion of the semiconductor integrated circuits (ICs) manufacturing process. It is a well-positioned player in the semiconductor industry and has further solidified its position with the addition of MicroProbe’s SoC probe card segment. The acquisition will make FormFactor a bigger player in the SoC probe card market.

However, the lingering macroeconomic weakness and softness in the PC market that affected FormFactor’s results in the last quarter are expected to continue in the next. Therefore, FormFactor’s core business (probe cards for DRAM and Flash) is likely to remain under pressure in the near term.

FormFactor shares carry a Zacks Rank #3 (Hold). Other technology stocks worth considering include Arm Holdings Plc Ads (ARMH - Snapshot Report), Atmel Corp. (ATML - Analyst Report), Tessera Technologies Inc. (TSRA - Analyst Report) each with a Zacks Rank #2 (Buy).

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